Probable. Every financial accountant under the sun has used this word in the context of financial statement accounting and disclosure. Where does it come from (at least in the technical or accounting sense)? The answer is SFAS No. 5, Accounting for Contingencies. This accounting standard has been around for decades and has been applied in a variety of circumstances. Within its pages we find some key definitions (see par. 3).
Probable. The future event or events are likely to occur.
Reasonably possible. The change of the future event or events occurring is more than remote but less than likely.
Remote. The change of the future event or events occurring is slight.
As an accountant, there seems to be this insatiable urge to place “probable”, “reasonably possible”, and “remote” into numerical expressions, for example, on a scale of 0% to 100%. It seems to me this can greatly assist accountants to normalize their views of how these terms are applied. I have come across some interesting studies that do just that:
- A 1990 research report published by J.E. Bortiz, PhD, FCA, summarizes findings that a rough correspondence between verbal expressions of probability and numerical values indicates the words “remote” and “probable” to be associated with average values of 10% and 70%, respectively. [Boritz, J., Approaches in Dealing with Risk and Uncertainty (The Canadian Institute of Chartered Accountants 1990), p. 24] Based on these numerical values, one would conclude that “reasonably possible” would fit in between 10% and 70%, however the report identifies a 60% average value associated with this expression.
- A study of accountant practitioners found that, based on survey results, “probable” meant an 85% likelihood of something occurring. [Stickney, C. and Weil, R., Financial Accounting: An Introduction to Concepts, Methods, and Uses (Thomson: 12th ed. 2007), p. 806]
Although these data points are not considered GAAP for financial reporting purposes, they provide insight that I believe can be helpful when dealing with accounting issues. Stay tuned for an upcoming post, where I will apply this research in the context of going concern.
